House flipping has been a popular real estate investment strategy for several years now, and it doesn’t appear to be slowing down anytime soon. If you’re considering getting in on the fix-and-flip trend and are considering using borrowed capital to purchase and renovate a property, there are several critical pieces of information you should know before signing a contract. In fact, there are loans that have been specifically created to fund fix and flip projects, and they’re quite different from the traditional home mortgage that you have heard of.
What is a Fix and Flip Loan?
To start, fix and flip loans (a.k.a. hard money loans or “rehab loans”) are short term loans specifically designed for the financing of real estate investments. While traditional home mortgages are issued by banking institutions, fix and flip loans are funded by private direct lenders.
What are the Main Differences Between Fix and Flip Loans and Traditional Home Loans?
The Length of the Loan
Traditional home mortgages are usually amortized over 15/30 years; while with a fix and flip loan, investors make monthly interest-only payments for a term of 6-24 months. Since most fix and flip lenders do not charge early payment penalty fees, you can pay off the balance as soon as your property sells. Conversely, if you need more time to complete the flip, many private lenders can offer 3-6 month loan extensions for qualified fix and flip borrowers.
Your Investment Property’s Condition
The condition of the property being purchased is another important difference between traditional bank loans and fix and flip loans. For example, a conventional mortgage lender will often have strict requirements surrounding the condition of the property, and the loan amount an investor can qualify for will be limited by their credit worthiness and the property’s as-is value. On the other hand, the as-is condition of the property is less relevant for fix and flip loans if there is sufficient after-repair value (ARV) to justify the loan amount. Fix and flip lenders understand that the property is being purchased with the intent to renovate, so the condition of the property is often poor.
Quickness of Funding
As you know, the goal of purchasing a fix and flip property is to renovate the home and flip it for profit as quickly as possible, so time is always a critical factor. Fix and flip loans are fast and flexible. These loans can often be approved and funded in as little as 5-10 days, while traditional bank loans can take anywhere from 45-60 days to close. Beyond that, the bank’s longer timeline is due in part to an extensive borrower application, strict rules about property condition and a detailed analysis of your finances. If anything at all appears “out of order,” a traditional lender will require more documentation, which further prolongs the approval process. It rarely takes less than a month to secure a traditional loan, which is quite a long time for fix and flip investors. If short sales or foreclosure properties are part of your fix and flip game plan, you should know that you will be competing with buyers who are gathering purchase agreements while you’re waiting to hear back from the bank. For this reason, the timeline of fix and flip loans are a major advantage.
Whether an Investor’s Credit Score is Considered
While the likelihood of obtaining a traditional loan is heavily based on the state of an investor’s credit, this is less important to fix and flip lenders. A fix and flip lender will base its approval decision more on the value of the property than an investor’s creditworthiness. Although there may be a minimum score a fix and flip lender will prefer, if an investor holds a significant equity position in a property, or they have a few successful flips in their portfolio, many lenders will take that into account and grant a loan regardless of credit score.
RCN Capital | Fix and Flip Loans
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next fix & flip investment.